BOLI (or COLI) products are used by banks (and corporations) to fund benefits of high income employees. There are substantial advantages to the use of these products to fund employee benefits, including substantial tax benefits for the employer. However, a disadvantage of such products is the variability and relative volatility of the policy values which must be reported on balance sheets of the banks (or corporations) owning the products. Over the long term, the returns on these products may be expected to be relatively high. However, in a short term, annual returns may be either positive or negative, sometimes causing substantial variability in the overall value of an employer's insurance portfolio from year to year.
This volatility problem has been addressed in the prior art by the use of Stable Value “wrap” contracts. A Stable Value investment has been defined as “[a] unique asset class offering defined contribution plan participants intermediate term returns and liquidity (subject to plan rules) without market value risk or other penalty. This is typically accomplished through a wrap contract or investment contract that guarantees the payment of plan-related benefits at book value (cost plus accrued interest) which enables the entire investment to be carried at its book value.” (Source: Stable Value Investment Association, www.stablevalue.org/glossary). The wrap contracts referred to in this definition may be used to smooth the volatility inherent in BOLI and COLI products. One example of such use in connection with COLI products is described in U.S. Pat. No. 5,926,792.
Use of a Stable Value wrap contract can virtually eliminate volatility of a protected investment account (or subaccount). However, this approach can be relatively expensive and cumbersome to employ and administer. Moreover, the degree of volatility reduction achieved with this approach may be more than is needed in certain instances.
There exists a need for an alternative “smoothing” mechanism which can be used to reduce the volatility associated with financial products, such as BOLI and COLI products. Described herein is such an alternative.